Crisis deepens as Russia-Ukraine gas deal unravels

The dispute threatens to paralyze economic relations.

After nearly a week of shutdowns that left 18 European countries facing severe energy shortages in a mid-winter cold snap, gas briefly began flowing again on Tuesday through the 4,000-kilometer pipeline (about 2,500 miles) that connects Russian gas fields with Europe via Ukraine.

But the tentative deal began unraveling almost immediately amid an escalating war of words between Moscow and Kiev. By Tuesday evening the gas flow had been blocked somewhere in Ukraine, to the consternation of European observers sent to monitor deliveries, and both sides were back to blaming the other.

The perennial dispute between the two former-Soviet states over prices and terms of transit is now boiling over into a crisis that threatens to paralyze economic relations and plunge Russia and the West deeper into diplomatic crisis.

Moscow maintains it’s simply a matter of weaning Ukraine from the Soviet-era subsidies that saw it paying less than half the global market price for its gas as recently as last year. Mired in economic troubles, Ukraine’s ability to pay the $450 per thousand cubic meters that Russia is now demanding seems uncertain. Ukraine relies on Russia for 75 percent of its gas needs, and the fuel is essential to power the steel and chemical industries that are the economic backbone of the former Soviet country of 50 million.
But as observers’ heads spin over the on again, off again flow of Russian gas, which accounts for a quarter of Europe’s total supply, there are growing suspicions that hidden concerns over Ukraine’s geopolitical choices and high-level corruption in both Russia and Ukraine may be the real factors driving this dispute.

“There are so many things about this conflict that are neither logical nor transparent, and it is the subject of many intrigues,” says Dmitry Vydrin, a deputy of Ukraine’s parliament, the Rada. “Nobody can say when or how it’s going to end. We all have many more questions than answers at this point.”

Russia has repeatedly accused Ukraine of sabotaging Europe-bound deliveries by illegally siphoning off gas that it’s unwilling to pay market rates for. Alexander Medvedev, deputy CEO of the Russian state gas monopoly Gazprom, added a fresh stick of dynamite to that charge Tuesday, suggesting that “a completely different country” may be orchestrating Kiev’s behavior. That’s a likely reference to the United States, which last month signed a “strategic partnership” with Kiev, which Moscow reads as support for Kiev’s bid to join NATO.

The rhetoric between Moscow and Kiev has flared to new heights in recent days, with Russian Prime Minister Vladimir Putin accusing Ukraine’s warring politicians of stealing gas to fund their political campaigns, and Ukrainian President Viktor Yushchenko replying that Russian claims are untrue and designed to “humiliate” Ukraine.

In an interview with German TV this week, Mr. Putin denied that geopolitical considerations mattered, but then slammed Ukraine’s “Orange” revolutionaries, who had pledged closer ties with the West, for leading the country astray. “The former leaders of the Orange Revolution have failed to live up to their hopes,” Mr. Putin said. “Political infighting [in Ukraine] is degenerating into a clash between clans. . . and [a] fight for access to financial flows, of which trade in Russian gas is one.”

Social discontent does appear to be looming as Ukraine’s twin political and economic crises go critical. A mid-December survey conducted by the independent Democratic Initiatives Fund in Kiev found that nearly 84 percent of Ukrainians believe the country is in dire straits. Fewer than 2 percent thought the situation was fine.

Russian experts deny that Moscow is attempting to exploit Ukraine’s weaknesses. After nearly two decades of providing cheap gas to Ukraine, Russian leaders simply want to end the constant wrangling over prices, says Nikolai Petrov, an expert with the Carnegie Center in Moscow.

“Russia has not gained a good image by subsidizing Ukrainian energy consumption, and gets accused of hostile actions against Ukraine when it tries to raise the price,” he says. “So Russian leaders are being pragmatic here, having decided that there’s little to lose by seeing this through. Putin has learned from the past, and it looks like he wants to get a solution that will last.”

But Mr. Petrov adds that Putin’s claim that Ukraine’s leadership is sunk in corruption is a case of “the pot calling the kettle black.”

Experts say that instead of contracting directly with Ukraine’s state gas firm, Naftohaz, Russia’s Gazprom sells its gas through shadowy offshore intermediaries who flip the payments back and forth, beyond any official scrutiny. One such entity, RosUkrEnergo, is 50 percent owned by Gazprom.

“It’s absolutely inexplicable why Gazprom has these joint ventures with obscure little companies, and transfers billions of dollars to them, unless the purpose is to evade taxes and reward particular unseen interests,” says Mikhail Krutikhin, a partner with RusEnergy, a Moscow-based consultancy. “Someone is getting that money. If this isn’t corruption, what is?” he says.

Mr. Vydrin, the Ukrainian parliamentarian, agrees. “Gas spells corruption in both Ukraine and Russia,” he says. “Neither Russian nor Ukrainian gas officials live on their salaries, and it would be very painful for them to give up this model of doing business.”